Markets' Two-Part Test: Nvidia Earnings, PCE Data

**Keith Lansford** (0:05)
Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.
I'm Keith Lansford, and here is Schwab's early look at the markets for Wednesday, August 26 Markets face a two-part test today, with key economic data arriving before the opening bell and a slew of tech earnings coming after the close. The busy day kicks off with two reports that could help shape interest rate expectations, the July Personal Consumption Expenditures or PCE Price Index, and an updated reading on Second Quarter Gross Domestic Product or GDP. Earnings from Nvidia, CrowdStrike, Synopsys and Salesforce have then put the AI trade back in the spotlight this afternoon. Markets head into these tests after getting some relief from the recent rise in oil prices and treasury yields early in the week. Benchmark Brent crude prices sank for a second consecutive day on Tuesday, hitting roughly $88 per barrel after the Trump administration opted for a sanctions campaign against Iran instead of military escalation. Renewed hope that Pakistan's mediation efforts will prove fruitful added to the downward pressure on oil. Treasury yields also fell across the curve for the second straight day. The retreat came after CNBC reported the Treasury could tap its general account to fund expanded buybacks of long-dated government debt. While falling oil prices and Treasury yields helped lift major indexes Tuesday, trade tensions remain a wild card for the markets. Over the weekend, the US instituted tariffs on roughly $20 billion of Canadian goods. The Trump administration then announced plans Monday to increase tariffs on cars, trucks and auto parts imported from Canada starting January 1st. Canada responded with dollar-for-dollar retaliatory tariffs on Tuesday, sparking concerns about a growing trade war. There are no winners in a trade war, said Michelle Gibley, Director of International Equity Research and Strategy at the Schwab Center for Financial Research. The breakdown of talks between the US and Canada over the weekend is resulting in tariff rates escalating once again. The losers will be consumers in both countries as tariffs contribute to higher inflation. The dispute with Canada isn't the only potential trade headache for markets. The Trump administration's sanctions campaign against Iran and its economic partners threaten a fragile trade truce with China this week. The US is also reportedly planning to impose an additional tariff on Chinese goods due to manufacturing overcapacity concerns. Market volatility related to China trade relations could return, but a continued trade truce is in both countries' best interests, said Ghibli.
Despite the trade and geopolitical tensions, market volatility has remained relatively subdued this week. The SIUBO volatility index fell roughly 2.5% on Tuesday and is trading near its year-to-date lows. The relative market column could face a test this afternoon when Nvidia reports earnings. Expectations are high for the AI bellwether, with analysts expecting both earnings per share and revenues to nearly double year-over-year. Options traders are pricing in a potential $280 billion post-earnings swing in Nvidia's market cap. Investors will also be closely watching forward guidance, margins and new product ramps in Nvidia's earnings report. The company's newly announced $500 billion financing platform aimed at supporting large-scale AI buildouts will be under the microscope as well. Earnings from the cybersecurity company CrowdStrike, the software giant Salesforce and the chip designer Synopsys could also make waves after the bell today. Names like Agilent Technologies, HP and Viva Systems are on the menu too.
The July reading of the Fed's favorite inflation gauge due at 830 a.m. Eastern time will likely be the highlight of today's economic calendar. Consensus expects year-over-year headline PCE to drop slightly to 3.6 percent. Core PCE, which excludes more volatile food and energy prices, is expected to match June's 3.3 percent figure. However, on a month-over-month basis, both headline and core PCE are expected to rise slightly, signaling the Fed may have more work to do to tame inflation. Futures traders are pricing in a roughly 36 percent chance of a rate hike at the Fed's mid-September meeting, according to the CME FedWatch tool. The odds of at least one rate hike over the next 12 months are now over 83 percent. The second estimate of second quarter GDP also do at 830 a.m. Eastern time could influence those odds. Consensus expects a 1.5 percent annualized growth rate, which would be in line with the first estimate. However, GDP was revised down significantly in both the first quarter of this year and the fourth quarter of last year. Another downward revision could challenge the case for a more hawkish Fed stance.
Rounding out the morning's economic data, durable goods orders could provide another read on the strength of the economy. Consensus forecasts of a 0.5% jump in orders for July up from 0.3% rise in June. An economic data on Tuesday, new home sales fell 10.5% in July to 607,000 units as high mortgage rates and home prices sidelined home buyers. June's S&P-Cotality Case Shiller Home Price Index came in above expectations, with the 20-City Composite Index climbing 2.1% year-over-year. August's Consumer Confidence Data also disappointed economists. Higher gas prices helped push the Conference Board's Consumer Confidence Index to a 7-month low of 89.4, down from 90.2 in July.